With the previous post having laid some further groundwork on top of the first one, this third and last one in the series will discuss very specific dimensions relevant to the success of startups in Africa, touching on financing, user adoption, and applications. My subsequent personal thoughts and conclusions hopefully provide some additional helpful pointers. A few questions I could not find an answer to in the process of exploring the former will be left open for discussion.
The financing ecosystem for startups in Africa
The possibility for (highly) speculative and risky businesses to grow and thrive certainly depends on the base they can build on in terms of capital available (and, to an extent, the attitude of investors as well).
One blogger points out a lack of accessible capital in Nigeria, in saying that „there are no VCs, no angel investors, no startup accelerators, no government support programmes”. While this may hold true for Nigeria, there do seem to be numerous potential sources for financing.
While I have not found too much on local grant programs besides the mention of their existence, the Silicon Africa blog lists a number of sources for funding to be made part of the equation. One of them, Angel Investment Network, claims to list 30.000 investors and about 100 bn. EUR worth of assets available for investment alone. Looking at the first couple of entries, however, it seems like anyone can sign up (one investor identified himself as a UK student) and most investors are indeed located outside of Africa. Every listed investor can define a range for his investments, so the maximum will likely be the sum of the high values of these ranges. Also, it has a primary focus on South Africa (though it seemingly is open for other parts of Africa as well).
I already referenced a directory of incubator programs in my first post, which for Nigeria lists WeHub and about ten other programs for the rest of the continent. This is not a whole lot as compared to other parts of the world, however – Berlin alone probably has as many.
For French-speaking Africa, Africa Synergies tries to connect Entrepreneurs and Investors. With a focus on media business, the African Media Ventures Fund injects capital and expertise from the Netherlands into startups or early-stage companies, so far in Kenya only, however.
In terms of later stage capital, eVentures, Khosla Ventures, GroFin, and Hasso Plattner Ventures (also providing early stage financing) seem to be amongst tech-focused funds, again mostly relying on foreign capital.
The points I am left wondering about are:
- whether any successful local entrepreneurs have become active as professional angel investors that can bring solid funding, relevant expertise, and direct involvement to the table, as you would commonly expect of business angels
- if any significant local growth stage funds exist
- to what extent the foreign investors provide the capital currently required already.
Adoption of technology and the mobile revolution
Internet usage in Africa was up by more than 1300% between 2000 and 2009, a rate at least four times as high as in Europe or the US. It lists Egypt, Nigeria, Morocco, South Africa, Sudan, Algeria, Kenya (in that order) as the most active countries.
The high adoption of mobile services has led to a rapid growth of networks and device usage. As a result, mobile networks now serve as the communication infrastructure for consumers, with fixed line broadband service having been leap-frogged and cell phones representing more than 90 percent of telephone lines.
The following graph provides a number of interesting insights.
For one, absolute numbers of internet users in Africa (as of 2010) are lagging behind those in Europe and the US by a large margin. Telephone lines also amount to a significantly smaller number. While the absolute number of mobile connections is impressive, it is also far below the relative adoption rate found in the industrial nations (with the North of Africa, South Africa, and a few other countries being the exception).
What becomes obvious, though, is the potential for further development in the Southern hemisphere. Only about 13% of the population are internet users in Africa. In terms of effective usage, another source claims that all of Africa, with a population of about 1 billion, has 5% of the internet usage of the United Kingdom, which has a population of 65 million.
With the growth rate for mobile phones over the past decade seeming staggering already, growing to 620 million from 4 million handsets in 2000, Sub-Saharan Africa still only sees about half of its population being equipped on average. At least 0,9 mobile phones are in use per person in the EU, the US, and the Middle East/North Africa.
Taking the use of Facebook as another indicator, 3,6% of Africans used Facebook at the end of 2011, as compared to 27,4% and 50,4% in Europe and the US, respectively. This figure grew by about 20% in the second half of 2011 alone. About 75% of these users can be found in only six countries: Egypt, South Africa, Nigeria, Morocco, Algeria, and Tunisia.
Looking at B2C business, the fact that only 10% of African businesses have an online presence hints at substantial potential in that domain as well.
While all this points at a large potential for further development, it always has to be seen in the light of the overall socio-economic climate. Poverty and access to the necessary infrastructure appear to be a deciding factor and must be barring the majority of the population from the show at this point.
Applications: same rules in the game?
At first glance it looks as though several businesses are nothing new when comparing them to what’s known from the US and Europe. There’s deal sites, social networks, music and movie portals, etc.
Looking at the adoption of existing solutions from other parts of the world, one also comes to realize that the African market likely does not support certain applications yet. Anything dealing with mobile consumption of rich media content will probably go beyond what both the infrastructure and distribution of suitable devices will support – at least for the masses.
According to AdMob, the types of phone commonly in use in Africa still differ significantly from what customers in most developed countries are accustomed to. With Nokia holding a large share of the market (66% in 2010) and looking at phone prices vs. average income, this seems to indicate that the technical capabilities of phones are rather limited as compared to, say, the most recent Apple or Samsung device. In 2011, the ratio between non-smart phones and smart phones was 32:1. Through 2015, it is expected to change to 5,6:1.
So for now, a lot of transactions appear to be relying on systems based on text messaging (SMS). The folks of Starfish Mobile, who offer SMS-based value-added services, give a great overview why in this presentation. This article on mobile in Africa in general is providing a perspective on how this may change and what it takes to drive the process.
One of the domains standing out in my eyes is mobile payments. These have been adopted several years ago already, building on the ever increasing dispersion of mobile devices. Examples for such services are M-Pesa, PesaPal, Kopo Kopo, and MPayer (all in Kenya). In retail, SlimTrader provides a system, named MoBiashara, that makes it possible for customers to query stock and place and process their orders via their mobile phones. M-Farm (Kenya) allows farmers to retrieve pricing information. Even Facebook and Twitter can be used based on text messages.
Certain other problems perceived as such in the developed world are probably still (very) far from being adopted in Africa. Pet food or customized chocolate boxes seem like the sorts that occupy significantly fewer minds there. One might even argue that large scale retail of high-ish priced items is already a challenging market to get into, given that only low shares of the population would be able to afford the articles on offer in the desired frequency (think shoes, sports gear, consumer electronics, furniture).
The above has provided a birds-eye view on the state of affairs. In terms of a final “judgment” on tech startups in Africa as a whole, one should keep in mind that a significant gap in terms of economic strength exists between the North African countries and Sub-Saharan Africa. This has not been stressed in the above much, but you might have noticed the over-representation of North African nations in the top positions of the rankings presented. Even a divide between West Africa, East Africa, and South Africa is apparent. While researching tech startups on the continent, countries lile Egypt, Tunisia, or Morocco have not popped up on my radar and I will for now refrain from following up on this. I’ll be happy to learn more in your comments to this post, however.
Content and connectivity determining success?
In terms of what will drive the success of African tech companies in the future, one blogger considers content (local and relevant) and connectivity (growing mobile networks, guaranteeing stable fixed line data networks) to be the driving forces. Whereas entrepreneurs can take care of the first part themselves, they probably rely on governments, telcos, regulatory bodies, and other institutions to build the necessary infrastructure.
Are income levels a challenge or does user volume do it?
As far as potential revenue streams for startup businesses are concerned, I am wondering, however, if these may be impacted by the limited budget consumers have on average for free spending. You might recall that only 20% of Africans spend more than USD 4/day, and only about 5% more than USD 20/day. In absolute terms, this still amounts to 200 million and 50 million people, respectively. Unfortunately, I couldn’t dig up more specific data on the distribution of spending above the USD 4 mark. One conclusion to be drawn may be, though, that an initial focus on products and services that address a clear (basic) need, ideally replacing an already existing and thus proven one, might be a good starting point for young companies to build traction from an already large number of potential users which should still grow over time..
Absolute revenue potential a limiting factor?
One challenge might also be the competitiveness on the international level, measured in absolute terms. Given the lower total spending to be generated from online ads, for example, the CPC and thus total revenues for those ads must be lower as well (possibly compensated in part by the sheer volume of users). Absolute online sales revenues could be limited as well as compared to international competitors. As long as this is in proportion to lower costs of production (for web-based business models models, these would usually be application development, infrastructure operations, and sales/marketing) this may just be acceptable. Looking at an option like the one of using foreign-hosted infrastructure mentioned earlier, this type of service will probably result in disproportionately higher costs when bought abroad. On the other hand, given the scale attained there, they may still be significantly cheaper than any other infrastructure built on a smaller scale in Africa.
Inversely, this may actually also be a protection from those foreign competitors who need to make significant investments to enter African markets at their usual costs. With these being disproportionately high as compared to the absolute revenues to be expected, such an endeavor only makes sense if these competitors can integrate local resources into their strategy or build on a setup that allows them to scale at very low marginal costs that can compete with those in Africa.
It thus seems all the more important for African startups to play the local card and build a strong lock-in of customers while the technological gap (esp. devices and reach) and economical gap (revenue potential) is still large enough for international competitors to be reluctant to enter those markets for these reasons.
Foreign capital: good or bad?
In terms of the sustainability of the long-term benefit of the model currently evolving, I am asking myself if the influx of foreign-sourced capital is the best way to go. It certainly helps making capital available in the first place. I would expect however, that large parts of the gains from such enterprises will be benefiting parties outside of Africa. Instead of feeding those gains back into local economies, they end up in those who already have plenty.
What talent base will carry the digital revolution?
A last thing I am left wondering is how the talent base in Africa is developing, e.g. what share of the population is tech-savvy to start with and capable of developing a skill set that will support the growth of tech-based businesses. With a significantly higher share of young people in the overall population than in other parts of the world, there is at least a theoretical potential to build a large pool of skilled experts.
I will leave it at these observations for now, hoping to get some feedback to build further discussions on. Also, please let me know if this helped you in any way or if you have made observations contrary to what I have found.